Heading into a quarter that is now expected to end with the third hike in U.S. interest rates this year, sector-oriented investors opted to focus on the macroeconomic data coming out of the U.S. (manufacturing output at a 13-year high), the Eurozone (growth regaining momentum in September) and Japan (business confidence the highest in a decade). Industrial, Energy, Utilities and Commodities Sector Funds all posted inflows during the week ending Oct. 4 that ranged from $358 million to $1.3 billion.
Also seeing significant inflows were Financial Sector Funds, which absorbed over $1 billion for the third week running. Investors are penciling in more favorable taxation and increased pricing power for U.S. plays, a reduction in bad loans for European banks as the recovery there gains steam and the benefits of tighter regulation of the shadow banking sector in China. Flows into dedicated U.S. Financial Sector Funds hit their highest level since early July.
The tax reform package proposed by U.S. President Donald Trump is–if it makes it through Congress–also expected to benefit technology, pharmaceutical and biotechnology plays, both directly and by encouraging them to repatriate foreign earnings. Biotechnology Funds did extend their longest inflow streak since early in the third quarter. But, despite retail commitments hitting a 15-week high, Technology Sector Funds posted consecutive weekly outflows for the first time in over a year as European regulators maintain their pressure on major U.S. companies.
Against a back-drop of favorable data from several major economies, Industrial Sector Funds posted their biggest inflow since late 2016, when optimism about the Trump reflation story was at its height. A single U.S.-domiciled ETF accounted for three quarters of the headline number. Two transportation and two aerospace funds were among the top 12 funds ranked by inflows.
Cameron Brandt is Director of Research for EPFR Global, an Informa Financial Intelligence company.